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Arctic gas project backs political strategy as Russia turns east

SABETTA, Russia (Reuters) - On the Arctic tundra far to the north of Moscow, Russia is charting a course away from the West and towards Asia.

In Yamal - which in the local Nenets language means "the end of the earth" - a $27 billion liquefied natural gas (LNG) scheme is assuming major political as well as economic significance.

The project fits well with a more aggressive eastward push by Moscow since the United States and European Union imposed sanctions over its annexation of Crimea from Ukraine last month.

Instead of sending gas by pipeline to long-standing EU customers, Russia aims to ship LNG from the remote Yamal peninsula by sea largely to Asian buyers such as China, which has avoided confronting Moscow since Russian troops took control of Crimea.

Yamal will eventually involve the drilling of more than 200 wells through the permafrost and building facilities to liquefy the gas. Construction at the port of Sabetta, more than 2,000 km (1,200 miles) north of Moscow, is well under way.

For those working in Yamal, the Western sanctions seem a remote threat even though one of the U.S. targets is Gennady Timchenko, a co-owner of gas producer Novatek which holds a 60 percent stake in the project. What matters is support from Russian President Vladimir Putin and foreign investors.

"We are confident. The port and the plant are under the protection of the president and government," said Vladimir Voronkin, deputy head of Yamal LNG, standing on what has become a vast construction site in the frozen tundra.

Voronkin noted that French energy group Total and China National Petroleum Corp each have 20 percent stakes in Yamal LNG. "Foreign investors put up money here - why would they want to lose it?" he asked.

Russia's reserves of Arctic gas are estimated at more than 30 trillion cubic meters and it hopes to convert a quarter of this into LNG, under a long-term plan to diversify away from the European market.

With the EU and Ukraine discussing ways to cut their reliance on Russian gas, Moscow has courted its Asian partners more aggressively, hoping to capitalize on record prices for LNG in Japan, China and South Korea.

Putin has hailed the Yamal LNG project and wants no expense spared. Russia now has just one LNG plant, controlled by state-run top gas producer Gazprom, on the Pacific island of Sakhalin with an annual capacity of 10 million metric tons.

Companies, including Sakhalin LNG shareholder Shell, have urged Russia to speed expansion of its LNG facilities or risk missing the peak in gas prices.

ELUSIVE CHINA DEAL

The head of state-owned energy company Rosneft, Igor Sechin, visited Asia last month and deputy prime minister Arkady Dvorkovich was quoted this week as saying from Beijing that talks on a gas deal with China had made some progress.

A deal between Gazprom and China has been in the works for at least 10 years. If one is finally struck, Putin could hold this up as proof that Western attempts to isolate Russia are destined to fail.

Brussels has imposed visa bans and asset freezes on several Russian officials over Crimea but it was the punitive measures from Washington that affected Timchenko, believed to be a long-term acquaintance of the Russian president.

Timchenko reported he had sold his nearly 50 percent stake in Gunvor, the world's fourth-largest oil trader, hours after his place on the U.S. blacklist was announced. But he has kept his 23 percent shareholding in Novatek.

At Sabetta, a site worker who gave his name only as Viktor said U.S. threats would not stop or slow the project.

"Do you think the government's seats are taken by fools, not knowing what to do? Do you know how interested Putin is in this project?" said Viktor, who is helping to build orange and blue pre-fabricated accommodation for thousands of workers due to move to Sabetta for at least some months of the year.

"Whatever the U.S. might say, all will be in place here," he said, showing newly painted rooms.

More than 10,000 people will eventually work at the project, producing 16.5 million metric tons of super-cooled gas by the end of this decade - enough to supply the world's fastest-growing energy consumer, China, for around a year.

Russia plans to double that over the next decade as additional fields start production.

BREAKING THE ICE

But first they must ensure LNG carriers can use the port at Sabetta all year round, even when it is ice-bound. This will involve using compressors to pump air under the ice, ensuring it breaks up more easily as ships push through.

The Arctic cold means that ships can travel from Yamal to the Pacific Ocean via the Bering strait only during five to seven months a year.

For the rest of the year, the LNG can reach the Pacific the long way round via the Suez canal but that more than doubles the distance to Shanghai, raising transport costs.

Novatek has also agreed to sell some of its LNG to Spain.

For now the port at Sabetta, built last year and this, is used for bringing in food, machinery, building material and firewood for saunas for the workmen.

Five thousand are employed at Sabetta, working for 45 days and then breaking for the same number and earning wages that range from 70,000 to 100,000 rubles a month - much more than the Russian average of 30,000 ($850).

"It's pretty comfortable when you are working like a dog for a month and a half and then having a rest for the same amount of time," said Viktor. "We will build it whatever."